Secondary menu

Main menu

Search form

Search the Charles Stanley site

You are here

Germany will pay the price for Italy’s provocation of Trump

The Italians have joined China’s controversial “New Silk Road” programme, a move that is likely to stoke the ire of Washington.

byGarry White

in Features

27.03.2019

Over the weekend, Italian populists handed Donald Trump yet another reason to turn his trade guns on Europe, increasing the risk of a German recession. At a signing ceremony in Rome, Chinese President Xi Jinping brought Italy into its Belt and Road Initiative (BRI) – the first European country to sign up to the increasingly-controversial programme. The inexperienced Italian government is split on whether this is the right move, as it tries to attract much-needed investment, but the real loser from the deal is likely to be Berlin.

Although there was a wobble in markets last week on concern that China may be pushing back against some US demands in the trade discussions, it’s still likely that some form of agreement will be signed next month. This will allow Washington trade hawks to move onto the next stage of their “America First” strategy – and all the signs are that the target will be Europe, as Donald Trump has a particular bee in his bonnet about German cars.

China is using its wealth to buy influence across the world at a time when China hawks have taken over the White House – and are preparing for a decades-long fight for economic supremacy and influence. Washington has already indicated its displeasure with Rome’s move. “Italy is a major global economy and a great investment destination. Endorsing BRI lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people,” the White House’s National Security Committee said. The “New Silk Road”, has come under extensive criticism for the amount of debt it piles on poorer countries it is trying to embed in its sphere of influence. Critics argue that this borrowing trap will be used to exert significant leverage on participating countries when they inevitably find themselves in financial distress. Indeed last year, as it creaked under a $1bn (£760m) debt to China, Sri Lanka was forced to hand over the strategic Hambantota Port to companies owned by the Chinese government.

There are also important geopolitical considerations too – as Washington and Beijing battle over their global influence. Last month, China Merchants Port Holdings took over operations at the strategic Doraleh Container Terminal in the small African nation of Djibouti. DP World sued China Merchants last year over the cancellation of a 25-year concession contract to exclusively run the terminal, which was terminated in favour of the Chinese deal This is significant for the US administration as Camp Lemonnier, the US’s only permanent military base in Africa, is located about 4km away. Now, the Italians want the Chinese to invest in the port of Trieste in order to make it the Asian nation’s gateway into Europe. This is a very provocative move.

The Italian government, although split on the issue, has tried to justify its position by arguing that other European nations have much more Chinese investment in their infrastructure than Italy. Indeed, China has been heavily investing in Europe for years, particularly in the UK. A Bloomberg analysis this week indicated that Chinese entities had bought or invested in European assets worth at least $318bn over the past ten years, with $70.6bn of these transactions in the UK. China has a minority stake in Heathrow Airport, it has stakes in solar farms in Norfolk and windfarms in Wales and it even has a part in Britain nuclear power stations such as Hinkley Point C, amongst many others.

Nevertheless, Rome’s embracing of the BRI is a major snub to Washington – one that comes at a pivotal time for global relationships. With Donald Trump currently sitting on Commerce Secretary Wilbur Ross’ report into whether imported vehicles posed a “national-security risk”, the timing for Berlin could not have been worse. Reports from Washington this week suggested that Mr Ross’ report had provided President Trump with a “legal rationale” to impose heavy new tariffs on foreign cars as soon as this spring. The Trump administration has 90 days from when it was completed in mid-February to decide whether to impose tariffs, so any action could take place in May.

Angel Merkel has said that the idea German cars threaten the US would be “a shock” – but that does not mean tariffs will not be imposed. However, there are some good reasons for hesitation; including the fact tariffs are likely to increase the cost of vehicles in the US significantly, hitting American consumers. Leaks from Capitol Hill suggest that US Trade Representative Robert Lighthizer is actually against imposing auto tariffs, as it could damage any goodwill towards the Trump administration in the Senate as well as hitting Americans in their pockets. However, the Italian provocation could help shift President Trump towards the view of his advisor Peter Navarro, who has a very protectionist view on the matter.

The Italians have handed China a major political victory at exactly the wrong time. Today’s signing ceremony demonstrates the naiveté of the Italian populists. They look set to make a bilateral agreement without bringing their allies in Europe and the G7 on board in a move that could have significant consequences across the continent. The feathers of the Washington hawks will be ruffled. Rome needs to understand that the BRI is not a magic pot of gold and it is likely to come with a significant sting in the tail.

Stay updated

Footer text

Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested.

Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange.